The federal estate tax can have a significant impact on your legacy, because it carries a 40 percent top rate. Fortunately, you can transfer a certain amount tax free before the estate tax will become applicable. This figure is called the estate tax exclusion.
It is increased every year to account for inflation, and since the new year is upon us, the 2021 figure has been released. Before we share it, we will take a look at the path we have taken to get to this point.
The Road to the Historic High Level
When you examine recent history, you can see that the estate tax exclusion has dramatically increased in a relatively short period of time. In 2001, the exclusion was just $675,000, and the top rate was 55 percent. It went up to $1 million the following year with a 50 percent max rate.
Over the next two years it was $1.5 million, and the exclusion was $2 million from 2006 through 2008. In 2009, there was a $3.5 million exclusion and a 45 percent maximum rate.
The Bush tax cuts included a complete repeal of the federal estate tax for 2010, but the legislative measure was scheduled to sunset at the end of that year. If nothing was done in the meantime, the exclusion was going to go back down to $1 million with a 50 percent rate.
A lot of people got a break when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was enacted at the 11th hour. It set the estate tax exclusion it $5 million for 2011, and the reduction in the rate to 35 percent was another positive for high net worth individuals.
This arrangement remained in place until the American Taxpayer Relief Act of 2012 increased the top rate to 40 percent, but the $5 million exclusion adjusted for inflation was retained.
It stood this way through 2017, and at the end of that year, the Tax Cuts and Jobs Act was enacted. This legislative measure essentially doubled the exclusion to a record high $11.18 million for the 2018 calendar year, and the 40 percent rate remained constant.
There have been inflation adjustments since then, and the adjustment for 2021 will raise the exclusion from $11.58 million to $11.7 million.
The aforementioned Tax Cuts and Jobs Act will sunset at the end of 2025, and at that time, exclusion will go back down to $5.49 million in 2017 dollars adjusted for inflation.
A new tax law can be passed in the meantime that can completely change the exclusion, and this is entirely possible since there will be a new administration. We will keep tabs on the situation and pass along updates as they become available.
Federal Gift Tax
We have a federal gift tax that exists to prevent people from giving gifts to avoid the estate tax, and it has been in place continuously since 1932. It was unified with the estate tax during the 1970s, so the exclusion is a unified exclusion that includes large lifetime gifts.
There is a separate gift tax exclusion that can be used to give up to $15,000 to an unlimited number of individual gift recipients in a calendar year tax-free. You would be using a portion of your unified lifetime exclusion to give a tax-free gift that exceeds this amount to any one person in a given year.
New York Estate Tax
Here in the state of New York, we have a state-level estate tax with a $5.85 million exclusion in 2020. There is no gift tax, but there is a three year clawback provision. If you give large gifts within three years of your death, they would count as part of your estate for tax purposes.
There is no updated figure for 2021 on the New York State Department of Taxation and Finance site at the time of this writing.
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